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Satyajit Das: Return of the Age of Gold


In economic chaos, war, or collapse, gold reappears, reasserting it grip on humanity.

In Germany, gold is now available from vending machines in airports and railway stations – Gold to Go. Shoppers can buy a 1-gram wafer of gold or a larger 10g bar. Seeking safety for their savings, individuals have purchased 150 tons of gold, mainly in the form of coins. Investors poured money into special funds (known as exchange traded funds (ETFs)) which pool investor monies to buy over 1,000 tons of gold. Having earlier sold off their holding, some central banks are now re-building their gold reserves.

Refiners are unable to keep up with demand for gold bars and coins. New gold vaults are being built to accommodate demands for secure storage.

As the Global Financial Crisis continues and the cure of easy money proves as dangerous as the disease, the gold price has increased from around $250 per troy ounce in 2001 to a peak of over $1,900 in 2011. It now trades at around $1,750 per ounce.

As poet John Milton wrote: "Time will run back and fetch the age of gold."

Monetary Status

In the 19th and early 20th centuries gold played a key role in the international monetary system, being used to back currencies. The international value of each nation's currency was determined by its fixed relationship to gold, with the precious metal being used to settle international accounts.

The problems of gold as a currency dominate Ian Fleming's 1959 work Goldfinger. James Bond, Agent 007, is sent to investigate Auric Goldfinger, a mysterious Swiss financier who is smuggling gold. Goldfinger's real plot is to boost the value of his gold through an audacious attack on the Fort Knox gold depositary.

In the film version, the attack features lethal nerve gas to be sprayed from a squadron of crop duster aircraft. The pilots are a bevy of buxom lesbian beauties led by a female villain, the unlikely titled Pussy Galore, played by Honor Blackman.

Goldfinger's plan entailed contaminating the gold by exploding a nuclear device -- a dirty bomb in the age of terror. Goldfinger's own stock of uncontaminated gold would increase in value astronomically in the process. Bond discerns the plot through dazzling mental arithmetic -- Fort Knox's $15 billion dollars of gold equated to over 400 million ounces which would weigh around 12,000 imperial tons making it difficult to carry off.

In Goldfinger, Colonel Smithers explained the monetary role of gold succinctly: "Gold and currencies backed by gold are the foundation of international credit…We can only tell what the true strength of the pound is… by knowing the amount of [gold] we have behind our currency."

The system operated more or less continuously until the early 1970s, when progressively the world moved to the era of floating currencies with no explicit link to gold.

The Return of Gold

Since the replacement of the gold standard with the dollar standard, the gold price has fluctuated widely. In January 1980, the gold price reached a [then] high of $850/ounce reflecting high rates of inflation and economic uncertainty. Subsequently, the recovery of the global economy saw the gold price fall for nearly 20 years, reaching a low of $253/oz ($8,131/kg) in June, 1999.

From 2001, the gold price began to rise due to a number of factors. One was increased demand, especially from emerging nations such as India and China. In 2007/2008, gold received an additional boost from the onset of the global financial crisis. Concern about a banking system collapse drove gold prices higher with gold prices finally passing the 1980 high reaching $865/ounce in January 2008.

In late 2009, gold price renewed its rise passing $1,200 in December 2009 on its way to over $1,913/ounce in August 2011. The 500% increase in the gold price since April 2001 prompted gold bugs to speculate about a new age of gold.
No positions in stocks mentioned.

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